Saturday, April 15, 2006

Alternative minimum tax

With April 15, er, 17 upon us, the annual call for a simpler tax code is reverberating off the pages of many a media outlet. Adam Smith's four pillars of an effective tax code--equity, certainty, convenience, and economy (efficiency)--have crumbled. As if they ever existed, that is. The Revenue Act of 1913 that formed the basis of the IRC, which was codified officially for the first time in 1939, was several hundred pages long. The current tax code is a hodge-podge of amendments that have been added on sporadically over for ninety years (it now approximates infinity-billion pages). The old stuff isn't scrapped. Instead, new stuff is piled on.

As tedious as the code has become, with over half of all Americans now hiring preparers, the reviled AMT is as big a target for criticism. It too is generally described as being shrouded in mystery. But it's actually pretty simple.

The taxpayer (MFJ) gets an exemption on the first $58,000 ($40, 250 for single filers). After that, income is taxed at a 26%. At $175,000 it shifts to 28%. Most deductions and credits disappear--those for tax-exempt vehicles, exemptions (children, sick widows and orphans, senile mothers), real estate and state tax deductions, and child and dependent tax credits. Some notables that remain are charitable contributions, mortgage interest, and gambling losses (!). It's a quasi-flat tax.

The amount owed under AMT is compared with what is owed under regular tax computation and the greater amount must be paid. Because the thresholds are nominal, the AMT hits more people in places that are relatively expensive (nominally, not necessarily in real terms). This also means the tax disproportionately snares folks in blue states (the r-squared for per capita mean income by state and the percentage of the state voting for Kerry in '04 is a statistically significant .30). The AMT is often derided for this, although the regular tax code essentially works the same way.

I'm not an AMT apologist. Losing the exemptions particularly irks me because it, like progressive credits/deductions such as the child tax credit and the phasing out of personal exemptions, encourages poor people to have children (although if they're perspicacious enough to execute tax-planning strategies it might not be as bad as I fear!) and discourages wealthy ones from reproducing. This accentuates the wealth gap (think if Bill Gates had twenty kids to spread his $60 billion across while Joe Broke passed his meager savings on to his only son instead of splitting it up among ten urchins). It also lowers the nation's IQ.

But the AMT is not that complicated. If it's all we had, the tax code would be a lot less confusing.

3 comments:

If she is not subject to AMT some year in the future, make sure she is aware that she can get a credit for the amount she paid in AMT in prior years over and above what her regular tax liability would have been. If she's dealing with the AMT, she probably has a CPA who's aware of the credit, but just in case.